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Unlocking Africa’s potential: Can Nigerian SMEs become the next unicorns?

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Nigeria’s economic landscape pulsates with the energy of over 39 million micro, small, and medium-sized enterprises (SMEs), according to the National Bureau of Statistics (NBS) 2021 survey. These businesses form the backbone of the nation, contributing 84 per cent of employment and accounting for 96 per cent of all businesses in the country.

Despite their impressive numbers, their true potential remains largely untapped. Transforming these local players into billion-dollar tech titans could be the key to unlocking exponential economic growth across Africa.

A look at the gap: Challenges hobbling Nigerian SMEs

The success stories of developed economies offer a compelling blueprint. For instance, the United States of America saw over 1,000 companies go public in 2021, raising $300 billion.

This vibrant ecosystem thrives on venture capital (VC) funding, with investments totaling $330 billion in 2021. Similarly, the United Kingdom boasts a well-established VC scene and the London Stock Exchange (LSE), with its Alternative Investment Market (AIM) catering specifically to smaller, high-growth companies.

Nigeria, however, faces distinct challenges that hinder its SMEs from replicating this success. Access to capital remains a significant hurdle. While the Nigerian Stock Exchange (NSE) is operational, it lacks the liquidity and number of Initial Public Offers (IPOs) seen in Western counterparts.

In 2021, African startups collectively raised $4.85 billion, with Nigeria being a significant player. However, this pales in comparison to the US and Europe, highlighting a funding gap that hinders Nigerian SMEs from scaling up.

Infrastructure woes further impede growth. Frequent power outages and a dilapidated transportation network create significant operational bottlenecks. The World Bank estimates that sub-Saharan Africa loses an average of 2.10 per cent  of gross domestic product (GDP) growth annually due to inadequate infrastructure (World Bank, 2020).

This translates to billions of dollars lost in potential output. A 2023 McKinsey Global Institute report estimates that closing Africa’s infrastructure gap could unlock up to $3.3 trillion in annual GDP growth by 2040.

Regulatory hurdles add another layer of complexity. Navigating Nigeria’s bureaucratic labyrinth can be daunting for even the most seasoned entrepreneur. Streamlining regulations and ensuring consistency are crucial steps towards fostering a business-friendly environment. The World Bank’s Doing Business report suggests that streamlining regulations in sub-Saharan Africa could boost formal employment by 13 per cent (World Bank, 2020).

The skills gap also presents a significant roadblock. The current education system often fails to equip graduates with the practical skills and entrepreneurial mindset needed to thrive in today’s dynamic job market.

According to the NBS, Nigeria’s unemployment rate stood at a staggering 33.30 per cent  in Q4 2020. Equipping the workforce with the right skills can empower individuals and fuel innovation and business growth. A report by the World Bank and UNESCO in 2016 estimates that a 1% increase in the average years of schooling in Sub-Saharan Africa can lead to a 0.37 per cent increase in annual GDP growth.

A roadmap to success: How Nigeria can cultivate its silicon savannah

Amidst these challenges, there are glimmers of hope. The Nigerian government, in collaboration with wealthy private individuals, can become the architect of this transformation. Here’s a roadmap to success, backed by compelling data:

Funding the future

1. Lure Venture Capital: Attractive tax breaks and strategic partnerships with international VC firms can create a fertile ground for VC investments in Nigeria. The US VC market, fueled by a supportive ecosystem, contributed significantly to the country’s 5.70 per cent GDP growth in 2021.
2. Empower Local Banks: Equipping local banks with the resources and expertise to provide loans tailored to the specific needs of SMEs is crucial. Development finance institutions (DFIs) and specialized SME lending institutions can play a vital role in bridging the funding gap.

Building the Backbone

Prioritize Infrastructure: Investing in reliable power generation, efficient transportation networks, and high-speed internet infrastructure is an investment in the future. Public-private partnerships (PPPs) can be instrumental in bridging the funding gap and accelerating these critical projects. A 2017 World Bank report estimates that every $1 invested in infrastructure in Sub-Saharan Africa can lead to a 10% increase in GDP growth by 2030.

Reliable Power Generation: Consistent electricity is the lifeblood of modern businesses. A study by the World Bank found that businesses in Sub-Saharan Africa with reliable access to electricity experience a 30% increase in productivity (World Bank, 2013).
Efficient Transportation Networks: Nigeria’s current transportation system is riddled with inefficiencies. Investing in modern infrastructure, like improved highways, efficient rail networks, and upgraded ports, can significantly reduce costs. A study by the African Development Bank (AfDB) estimates that improving transportation infrastructure in Africa could reduce logistics costs by up to 30 per cent, making Nigerian businesses more competitive globally (African Development Bank, 2019).
High-Speed Internet Infrastructure: Investing in broadband infrastructure, such as fiber optic networks, can unlock a world of opportunities for Nigerian businesses. Increased internet connectivity can fuel innovation, facilitate e-commerce, and connect businesses to a global marketplace. A World Bank study found that a 10% increase in broadband penetration can boost economic growth in developing countries by 1.38 per cent (World Bank, 2016).
The Power of Public-Private Partnerships (PPPs): PPPs leverage private sector expertise and financing to develop and manage infrastructure projects. The government can provide land, permits, and regulatory frameworks, while the private sector brings in capital, technology, and operational expertise.

 

A Call to Action

The potential benefits of a robust infrastructure network in Nigeria are undeniable. It can unlock economic growth, create jobs, and improve the overall quality of life for citizens. By prioritizing infrastructure investments, fostering public-private partnerships, and leveraging innovative financing models, Nigeria can cultivate a thriving ecosystem for SMEs and potentially birth its own generation of “unicorns.”

The success of these SMEs will not only translate into economic growth but also create a ripple effect, empowering individuals, fostering job creation, and propelling Nigeria towards a brighter future.

 

Elijah Oyeyinka is a seasoned finance executive with over 8 years experience in finance, accounting, and corporate strategy. He is currently an Investment Banking Associate at TD Securities LLC USA. He holds a B.Sc. in Economics from Obafemi Awolowo University (First Class Honours) and an MBA from University of Michigan, Ross Business School. He is also a Chartered Accountant and associate member of ICAN, with cognate theoretical and practical experience.